Key takeaways

  • The COVID-19 crisis is accelerating several key trends impacting providers, thereby presenting an opportunity for leading health systems and physician practices to rethink and optimize strategies for the future.

  • Consolidation will accelerate further after COVID-19 recedes as providers seek economic safety and leverage, and increased telehealth adoption is here to stay.

  • Providers nationwide must adopt disaster preparedness as a core competency to ensure a successful rebound and plan for the next crisis.


Providers are on high alert due to the global impact of COVID-19. Current and potential future waves of infections, lockdowns and reopenings — and their impact on provider operations and finances — present an unprecedented set of challenges. Still, it is not too soon for forward-thinking health systems and provider practices to plan for big potential changes to the local market ecosystems in which they deliver care. In this Executive Insights, we outline three such changes, all of which point to an acceleration of preexisting trends. Though each is well documented, executives and investors may not have fully internalized the broad implications for their organizations.

Bigger is better

Provider consolidation is unquestionably a long-term secular trend, as hospitals seek the advantages of scale and the “corporatization” of physician practices continues to professionalize one of America’s few remaining cottage industries. The number of healthcare mergers and acquisitions announced or closed rose to 768 in 2019, up from 705 in 2018. Affiliation and partnership announcements have similarly reached record high levels.

There is plenty of additional runway. Independent physician practices represent over half of total practices in most clinical specialties, and can be over 90% (Figure 1). 

For more information about physician practice management (PPM) dynamics, please visit Physician Practice Management (PPMs) – A New Chapter
 

In recent years, enterprising providers have had great success targeting high-margin, ambulatory patient care events — often at the expense of general hospitals. But many of these providers are small- and mid-sized businesses (SMBs). Like SMBs in any other industry, they face a cash crunch and an uncertain horizon due to COVID-19 and recession concerns. Some practices have seen no-show rates jump from 5% to 75%, and many have had to lay off staff to keep their doors open.

Whether the next national emergency or economic shock looks like this one or something completely different, the higher risk profile of these SMBs has been made clear. We believe the “marginal entrepreneurial doc” will increasingly see large group or system employment as safe and attractive.

The same goes for smaller/regional ambulatory surgery centers (ASCs), urgent care centers and free-standing emergency departments. For example, ASC share of outpatient surgical procedures has grown at a rapid pace as investor money has flowed in and smaller practices have jumped on the opportunity (Figure 2). It’s easy to see why: ASCs represent the highest-margin providers in the care continuum (Figure 3). 

For more information about ASC dynamics, please see Ambulatory Surgery Centers: Becoming Big Business

ASC revenues have declined during the COVID-19 crisis, with many furloughs taking place as demand has decreased. Outpatient surgical centers have closed doors due to skepticism that demand will return quickly enough. Meanwhile, large systems and practices may have an opportunity to consolidate share in their local markets.

Of course, for hospitals themselves, many investments have been called off or delayed due to the crisis. We believe more transactions will be initiated as some hospitals and specialized providers are forced to consolidate or close in the wake of COVID-19. Smaller providers need financial solvency, which they can achieve through mergers, acquisitions and partnerships. Fitch Ratings has already moved 15 hospitals to Rating Watch negative due to their financial positions, which may make them prime targets for healthier, scaled health systems to acquire.

For more insights related to the impact of COVID-19 on U.S. hospitals and the pace at which they are ramping back, please visit L.E.K.’s COVID-19 Insights Center.

Consolidation will accelerate post-COVID-19. Scale provides economic safety as well as leverage with payers and employer groups. Health systems and large provider groups should be thinking now about how to scale up.

Virtual care — just fine after all 

Historically, use of telehealth as a major treatment modality for patients had been met with skepticism and challenges. Four main barriers prevented widespread adoption:

  1. A belief that patients prefer face-to-face care
  2. A belief that physicians prefer the office setting
  3. Regulatory hurdles that prevented physicians from providing service (e.g., across state lines)
  4. Reimbursement hurdles

The COVID-19 crisis has proven the first two beliefs false — patients and physicians are widely adopting and embracing telehealth services. Providence Health, for example, saw telehealth visits skyrocket from 700 a month to 70,000 a week. Duke Health has had over 1,000 video visits and 3,400 telephone consultations in a single day — up from 100 a month prior to the outbreak. And Johns Hopkins is offering virtual appointments for primary care patients as well as those with complex specialty care needs, causing its telehealth visits to grow from eight patients a day to well over 1,200.

As health systems embrace this new normal, virtual care will become sustainably widespread. Even specialties that resisted telehealth adoption will continue above historical penetration levels (Figure 4). Ultimately, we expect premier health systems to move beyond providing telehealth services regionally and toward a national or even global footprint — giving more patients access to excellent healthcare, regardless of location.
 

Barriers to widespread usage remain for now. According to TechCrunch, only 36 states mandate that insurance payers cover telehealth, which can often be provided only to existing patients and does not include the use of asynchronous methods (e.g., remote monitoring) nor allow for interstate care. But regulatory and reimbursement hurdles will fall. Policies have already changed, at least temporarily, to expand telehealth coverage across specialties and care settings, waive copays and loosen Health Insurance Portability and Accountability Act (HIPAA) privacy requirements.

We have no doubt that we are entering a sustained new era for telehealth. Leading health systems probably cannot “over-bet” this trend.

For more information about telehealth uptake during COVID-19, please see Care at a Distance: Telehealth Expanding Beyond Borders.

Disaster preparedness as a core competency

Providers nationwide have awoken to the need to be prepared for the unexpected. This crisis (and any future ones) requires immense operational flexibility: the ability to turn on a dime for an unknown length of time, to return to form swiftly as the crisis wanes, and to effectively manage people, resources and patients throughout these disruptions. All of which must be accomplished while keeping long-term strategic initiatives on track.

To ensure a successful rebound and plan for the next crisis — as detailed in our recent report, Preparing Your Business for Post-COVID-19 Recovery — providers must think along four key dimensions: growth orientation, patient engagement and management, operational readiness, and organizational alignment (Figure 5).

  1. Growth orientation:
    • Understanding changes in patient needs (e.g., services, modes of care delivery, home care)
    • Clear post-crisis plans for capturing share in high-value patient/employer segments (e.g., commercial population, provider-sponsored risk)
    • Up-to-date knowledge of local market dynamics, including competition, and an M&A outlook
       
  2. Patient engagement and management: 
    • An updated post-crisis marketing strategy to capitalize on increasing healthcare consumerism
    • Patient management protocols to ensure patients do not experience a lapse in care or worsening of conditions given limited access
    • A patient engagement strategy that reflects the “new normal” of patient expectations 
       
  3. Operationally Ready: 
    • War room crisis management skills
    • An agile supply chain, including backup sources and actively monitored demand signals
    • Flexible capacity management, including swing capacity in the ICU and other units, and the ability to shift non-emergent care (e.g., prenatal) to contained, off-site locations
    • Pressure-tested investment parameters, capital sources and cash management to facilitate rapid decision-making 
    • A consideration of value-based contracts as fee-for-service takes a hit from drops in procedure volume
       
  4. Organizationally aligned: 
    • Resources focused in areas most critical for rapid growth (e.g., consolidation plays, telehealth deployment)
    • Management commitment to clear strategic objectives and business priorities
    • Coordination and alignment with physicians, considering physician recruitment and retention and avoiding burnout

Conclusion

Leading health systems and practices are well positioned to take advantage of all these trends and — in the process — enhance care continuum control, increase market share and better achieve their missions across local footprints and beyond. Providers should also be thinking about how to fully leverage their scale and “safe harbor” status to put themselves on strong footing for years to come.

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